Mortgage profits squeeze to hit banks

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When it comes to the primary secondary spread, the industry is accustomed to stability.

According to recent research from the Fed, the spread was stable at 30 basis points from 1995 to 2000 and then rose to 50 basis points in early 2008 before heading even higher to more than 100 basis points, where it hovered since 2009. Until now. In late 2012, the spread widened to a whopping 150 basis points, leading to all kinds of angst in the industry.

Some critics pressed the case that banks were cashing in on QE3 in unseemly fashion, riding the Fed's quantitative easing to fatter profits without passing on the benefits to end consumers. But the fears of profiteering are quickly evaporating, as the spread continues to narrow.

As noted by the Financial Times, the spread has narrowed to a mere 100 basis points or so. The fear now is that profits from mortgage operations are drying up too quickly. Not only is spread lower, but demand for new mortgage seems to be falling after a huge spike sparked by lower interest rates over the past year or so. This at a time when some banks have staffed up significantly in hopes of more businesses. Some big banks were able to ride mortgage profits, offsetting weakness in some investment banking and trading units, but those offsets may be much lower going forward, as the spread is not expected to widen dramatically again soon. -Jim

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